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Combining VAR and DSGE forecast densities

  • Wolden Bache, Ida
  • Sofie Jore, Anne
  • Mitchell, James
  • Vahey, Shaun P.

A popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing; see (among others) Stock and Watson (2004), Clark and McCracken (2010), and Jore et al. (2010). Existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium (DSGE) models, despite the widespread use of these models by monetary policymakers. In this paper, we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions (VARs) and a policymaking DSGE model. The DSGE receives a substantial weight in the pool (at short horizons) provided the VAR components exclude structural breaks. In this case, the inflation forecast densities exhibit calibration failure. Allowing for structural breaks in the VARs reduces the weight on the DSGE considerably, but produces well-calibrated forecast densities for inflation.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 10 (October)
Pages: 1659-1670

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:10:p:1659-1670
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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